Answer (B) is correct . Since Intelinet’s ROCE, net income, assets, and debt (in terms of Comp’s debt) are known, they can be plugged into the formula for return on common equity to determine Comp’s debt level: ROCE = (Net income – Preferred dividends) ÷ Average common equity .17 = ($10,000 – $0) ÷ ($100,000 – 2D) ? .17 × ($100,000 – 2D) = $10,000 $17,000 – .34D = $10,000 .34D = $7,000 D = $20,588 Now that Comp’s debt is known, it can be substituted in the ROCE formula to find net income: ROCE = (Net income – Preferred dividends) ÷ Average common equity .17 = (NI – $0) ÷ ($100,000 – $20,588) = NI ÷ $79,412 NI = $13,500 Since Comp’s sales are one-half those of Intelinet, they amount to $175,000 ($350,000 ÷ 2). Therefore, Comp’s profit margin percentage is $13,500 ÷ $175,000, or 7.71%.
Answer (A) is incorrect because This percentage is based on the wrong income.
Answer (C) is incorrect because This percentage is the return on assets for Intelinet Corp.
Answer (D) is incorrect because This percentage is the return on assets for Comp.
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